The Reserve Bank of India (RBI) has expanded the eligibility criteria for STRIPS (Separate Trading of Registered Interest and Principal of Securities) to include all central government bonds and select state securities. This move aims to enhance liquidity and investor access in the government securities market. STRIPS allow the separation of interest and principal components of government securities, enabling them to be traded independently as zero-coupon instruments. This increases liquidity and provides additional instruments for fixed-income investors.
The key amendments to the STRIPS guidelines include the expansion of eligibility criteria to all fixed coupon securities issued by the Government of India, regardless of their maturity date. Additionally, fixed coupon securities issued by State Governments/Union Territories are now eligible for stripping if they have a residual maturity of up to 14 years and a minimum outstanding amount of Rs. 1,000 crore on the day of stripping. The operational system reference has also been updated to reflect the migration to a more modern and centralized platform for processing such transactions.
The implications of these amendments are significant, with increased liquidity and participation from a wider range of investors, including pension funds, insurance companies, and banks. The development of a long-term zero-coupon yield curve is also expected to be supported, enhancing pricing efficiency. Furthermore, state governments will gain better access to secondary market liquidity, potentially improving the attractiveness of State Development Loans (SDLs).
The expanded eligibility criteria for STRIPS is expected to modernize the operational framework and align it with current market dynamics. The RBI’s decision to include state securities in the STRIPS framework is a significant development, as it will provide state governments with better access to liquidity and potentially reduce their borrowing costs. Overall, the amendments to the STRIPS guidelines are expected to enhance the efficiency and liquidity of the government securities market, benefiting both investors and issuers.
The RBI’s move to expand the STRIPS eligibility criteria is also expected to support the development of a more diversified and efficient government securities market. By providing investors with a wider range of instruments to choose from, the RBI aims to increase participation and liquidity in the market. The inclusion of state securities in the STRIPS framework is also expected to promote financial inclusion and support the development of state governments’ borrowing programs. With the updated guidelines, the RBI is taking a significant step towards modernizing the government securities market and promoting greater efficiency and liquidity.